Nortel Networks: How Innovation and Vision Created a Network Giant - Hardcover

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About the Author Larry MacDonald writes technology columns for the Ottawa Citizen, Montreal Gazette, Investor's Digest, and the Financial Post. Previously, he was an economist with the Canadian federal government. He is the author of Outperforming the Market: A Case-Study Approach to Selecting Investments.

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Nortel Networks Nortel Networks is one of the companies at the heart of the Internet revolution. One of the biggest stories now unfolding is the fierce rivalry of three titans to construct and expand the networks of the future. Nortel, Cisco, and Lucent are all racing to meet the exponential growth in Internet use and to satisfy the insatiable demand for bandwidth to handle the tidal wave of Internet traffic. The company that got its start in 1895 as the manufacturing arm of Bell Telephone of Canada-just shortly after the invention of the telephone itself-has become a world leader in the hugely competitive telecommunications industry. In the Internet age, as voice and data converge, Nortel has transformed itself from a hardware manufacturer into a new-economy powerhouse built more on software, wireless technology, and fiber optics. No company over 100 years old is without its ups and downs. And Nortel is no exception. Nortel Networks: How Innovation and Vision Created a Network Giant recounts the drama of a technology company that has survived two World Wars, the Great Depression, and numerous recessions. The cast of characters is full of fascinating people who worked together to build a corporate empire-CEOs that steered Nortel perilously close to the rocks of ruin, and leaders that gave the company the vision that allowed it to soar to new heights; dedicated scientists and engineers who drove the innovations that have kept Nortel at the front of the pack; politicians and regulators with their own agendas; contacts and customers around the globe that each had a role to play in the Nortel story. Over its long history, Nortel has gone through several corporate shake-ups. These frequent transformations have kept the company lean and focused, a battle-hardened veteran well prepared to deal with turbulence and confrontation. In fact, it is out of disruption and discontinuities in markets, products, and technologies that Nortel has emerged triumphant many times over. They have been what Nortel looks for in order to survive and gain position. The legacy is an entrenched culture of change, speed, and innovation. Whether through in-house research and development, or through its recent and ongoing frenzy of acquisitions, Nortel continues to produce leading-edge product portfolios at just the right time. From the manually operated telephone switchboards of the 1890s to the digital switches that today direct voice, data, and video traffic on the fiber-optic systems of the Internet, Nortel has been at the forefront of technological innovation for over 100 years. The company's relentless commitment to R&D has enabled it to move from old technology to new technology many times over, in times of crisis and prosperity. Today, Nortel is at the forefront of laying down the information superhighways now revolutionizing the lives of everybody everywhere. Nortel's annual revenues have seen almost uninterrupted growth, going from approximately $200 million in the early 1960s to $22 billion in 1999. In the process, its common shares, first listed in 1973 on the Toronto Stock Exchange (and a few years later on the New York, London, and Tokyo exchanges), have made long-term investors very wealthy. The first ten years of trading, to 1983, brought an appreciation of over 1,000 percent. After a period of drifting in the 1980s, the stock price resumed its upward trend with vigor in the 1990s. The final two years of the decade were especially strong, when the share price quadrupled from the 1998 low. In Nortel Networks, Larry MacDonald brings insight and a strong sense of where the company is headed. He takes the story from the humblest beginnings, right up to the present day, and looks into the future at some of the possible outcomes of Nortel's strategies to become the world leader in the new digital revolution.

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Introduction

It is somewhat remarkable that a centenarian company is at the centre of rolling out the Internet. Many companies come and go in the ever-changing technology industries. They burn brightly for a time following the launch of an exciting new product, but then they fade away when another company leapfrogs ahead on the technology curve. Nortel is one of the exceptions. The company has experienced many ups and downs over the years, but it has somehow managed to make vital transitions from old to new technologies.

To keep the image of the company current with evolving technology trends, there have been several name changes along the way. The first name, starting in 1895, was Northern Electric and Manufacturing Company. Under this label, the company was at the forefront of bringing the technology of an earlier era - the telephone, fire alarm boxes, phonographs, and other electrical appliances - to the population in its home base of Canada. In the middle of the 1970s, the company's name was changed to Northern Telecom Limited to reflect the change in its product portfolio arising from the new telecommunication services such as data transmissions. The third name change, to Nortel Networks Corp., came near the end of the 1990s to acknowledge the growth and convergence of global networks for voice, data, and video transmission.

The past four decades have been the most remarkable phase for this centenarian of technology companies, as indicated by virtually uninterrupted growth in annual revenues from approximately $200 million in the early 1960s to $22 billion in 1999. In the process, its common shares, first listed in 1973 on the Toronto Stock Exchange (and a few years later on the New York, London, and Tokyo exchanges), have made long-term investors very wealthy. The first ten years trading, to 1983, brought an appreciation of over 1,000 percent. After a period of drifting in the 1980s, the stock price resumed its upward trend with vigor in the 1990s, although there were some short-term setbacks in 1993 and 1998. The final two years of the decade were especially strong, when the share price quadrupled from the 1998 low. The severe recessions of the early 1980s and 1990s did little to halt the advance; in fact, Nortel shares were one of the few to rise during those troubling times.

Here is a company that appears to be doing something right. How so? How was it able to reinvent itself and adapt to new challenges? What are the lessons for managers, employees, business consultants, and academics? What are the insights for technology investors seeking to spot long-term winners? What are the lessons for economists and policy makers concerned about nurturing key industries and new technologies? These are some of the questions addressed in this book.

One of the main factors in the Nortel success story is capitalizing on discontinuities, those sudden breaks in the environment or the way things are done. They have been what Nortel looks for in order to survive and gain position. When a discontinuity occurs, it is a new race in which all participants go back to the same starting line. Without discontinuities, the advantage would be to the established firm, the one that possesses a dominant share of the market and superior resources. But introduce change - either to the technology or to the market framework itself - and it's a whole new ball game.

The discontinuities that Nortel exploited were, of course, technological-the transition from analog to digital telephone systems, from wired to wireless communications, and from cop- per-based to fiber-optic transmission systems. The company did not have the depth of the genius of AT&T's Bell Laboratories to come up with basic breakthrough in technology. But it did have an executive and research team with the foresight and appreciation of over 1,000 percent. After a period of drifting in the 1980s, the stock price resumed its upward trend with vigor in the 1990s, although there were some short-term setbacks in 1993 and 1998. The final two years of the decade were especially strong, when the share price quadrupled from the 1998 low. The severe recessions of the early 1980s and 1990s did little to halt the advance; in fact, Nortel shares were one of the few to rise during those troubling times.

Here is a company that appears to be doing something right. How so? How was it able to reinvent itself and adapt to new challenges? What are the lessons for managers, employees, business consultants, and academics? What are the insights for technology investors seeking to spot long-term winners? What are the lessons for economists and policy makers concerned about nurturing key industries and new technologies? These are some of the questions addressed in this book.

One of the main factors in the Nortel success story is capitalizing on discontinuities, those sudden breaks in the environment or the way things are done. They have been what Nortel looks for in order to survive and gain position. When a discontinuity occurs, it is a new race in which all participants go back to the same starting line. Without discontinuities, the advantage would be to the established firm, the one that possesses a dominant share of the market and superior resources. But introduce change - either to the technology or to the market framework itself - and it's a whole new ball game.

The discontinuities that Nortel exploited were, of course, technological - the transition from analog to digital telephone systems, from wired to wireless communications, and from copper-based to fiber-optic transmission systems. The company did not have the depth of the genius of AT&T's Bell Laboratories to come up with basic breakthrough in technology. But it did have an executive and research team with the foresight and know-how to turn technological breakthroughs into commercial successes faster than others.